EUR-crosses Begin to Lose Traction at Start of Week

Talking Points:

- EURUSD's only bullish appeal rooted in stretched positioning.

- EURGBP, EURJPY technical structures remain fairly weak.

- See the April forex seasonality report.

The Euro has once again started to slip back thanks to its deflating yield appeal and advancement along the path of a funding currency. As the differential between the short-end and the long-end of the yield curve decreases (in Germany the 2s10s spread has fallen to 0.339% at the time of writing from 0.638% on January 1), the Euro continues to lose its appeal from a growth perspective; and its appeal as a funding currency increases as rates towards the long-end drop into negative territory (German yields out to 9-years are negative: German 9-year yield now -0.08%).

Ultimately, the drop in sovereign yields decreases the demand for Euros thanks to the "portfolio rebalancing channel" effect, something ECB President Mario Draghi has been discussing for much of this year (an effect touted by former Fed Chair Ben Bernanke and now by current Fed Chair Janet Yellen). With nominal yields falling and inflation expectations holding stable (and even slightly rising), real returns on fixed income investments are decreasing; in turn, this fuels demand for higher yielding/riskier EUR-denominated assets like equities; or forces Euro-Zone-based investors to look outside the region for opportunity – which means capital needs to be converted from Euros into foreign currencies to fund investments. Sustained capital flows should remain a factor in keeping the Euro pinned lower.

See the above video for technical considerations in EURUSD, GBPUSD, EURGBP, and EURJPY.

Read more: EUR/USD Appeal Due to Covering Potential, Not Yield Prospects

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

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